Last week was a heart-stopper for gold bugs when prices plunged briefly to a seven-month low of $1,238 an ounce before bouncing back to $1,260.
But if this trading pattern seems familiar to summer deck chair investors, then you are quite right. In the same week last year, gold hit rock bottom and then rallied $150 in the next two months. A spike lower is also typical of a market bottom.
Gold has basically been stuck in a sideways trading channel for the past five years. That’s a long time for any asset class to be stuck on the road to nowhere.
Needless to say US stocks have outperformed by a mile. The S&P 500 is up 70 per cent in those years.
It’s not really good enough to blame the strong US dollar this year for gold’s weak performance. Gold also under-performed in the previous two years when the greenback was weakening, although it did finally break out of a downtrend and consolidate sideways in a trading range.
A far more important factor has been the increasing attraction of risk-on markets like the US stock market as the economic recovery from the 2008 to 2009 global economic crisis has picked up pace; latterly the enthusiasm for US President Donald Trump’s tax cuts and repatriation of profits and even cryptocurrencies as a rival speculative asset.
However, every dog has its day and there is a growing school of analysts who think US equities are overdue for a correction after a very long bull market, if not a full-on crash, as soon as this autumn, with October the traditional month for such events.
The signs of a faltering global economic recovery have been flagged up recently by the International Monetary Fund. World stock market indices are already sharply down for 2017, and even the US markets have been struggling to maintain all-time highs amid greatly increased volatility this year.
Chinese stocks have undergone a 20 per cent correction, with the world’s third largest economy after the US and EU faltering under the weight of its own bad debts, years of over-expansion and now the start of Mr Trump’s trade war last Friday.
So I suppose the big question for gold bugs, after surviving another difficult week, is whether a US stock market correction might provide a big boost for precious metals this autumn? To my mind there has never been a better time to sell US shares and buy bullion, nor a more obvious winning strategy.
The global financial crisis was at first a curse and then a blessing for gold. Initially bullion prices were pulled down as the Titanic hit the iceberg. But then over the following 18 months precious metals rallied the most of any major asset class.
Would it be the same story again? History does repeat itself. But nobody really expects a repeat of the crisis. Even long-standing bears like Marc Faber don’t consider a major economic crash at all likely.
Therefore, gold forecasters presently point to more recent episodes of US stock market weakness as a guide to what might happen.
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For example, when the Dow Jones dropped 2,000 points at the start of 2016 gold rallied hard, though not enough to break out of the trading range mentioned earlier.
In the first quarter of 2016, inflows into gold exchange-traded funds did jump by the second highest ever, still some way short of the highest-ever inflow in the first quarter of 2009 when the S&P 500 hit the devil’s bottom of 666 that March.
Indeed, if you are looking for the cheapest hedge against a stock market correction this year, then one ranking of the alternatives recently put gold in first position ahead of cash and US treasuries. Some of the smartest money is doing just that.
Precious metals analyst Theodore Butler wrote earlier this month about how the biggest bullion bank JP Morgan has established a very large long position in gold and silver by double-crossing other commercial gold traders into thinking it was time to short gold.
It’s very complicated to understand such machinations in the gold futures market. But Mr Butler is always well-informed and his conclusion straightforward: "I believe JP Morgan’s pronounced buyback of short positions portends a very sharp price rally for gold and silver and other metals," he said.
If the world’s largest bullion bank is positioned ready for higher gold prices, and has taken advantage of the summer doldrums to do so - possibly also creating those doldrums in the opinion of Mr Butler and his acolytes, then perhaps we should all be doing the same thing.
Seasonal trading in precious metals is important, and don’t forget the Indian religious buying season also comes in autumn.
The really big question is how gold will perform when it gets out of its five-year funk, assuming that it does not plunge into oblivion.
Forecasters talking about $5,000 or $10,000 an ounce have been very thin on the ground recently, another classic contrarian sign of a market bottom with all the bulls throwing in the towel.
And yet last year we saw Bitcoin unexpectedly rocket from around $1,000 to $20,000 in the second half. Could gold confound the skeptics and do the same thing this year?
Consensus wisdom, not surprisingly, thinks a trade war and a credit crunch this autumn will cause a further flight to the US dollar, yen and Swiss franc. That would be bad for gold.
But there is a contrarian view that higher interest rates will still be running far behind rising global inflation - trade wars are inflationary - and that is definitely a gold positive scenario.
Moreover, treasury yields have actually been falling since mid-May, so much for the theory about trade wars and higher interest rates. Russia dumped half its US treasuries in April, so will the world’s largest gold consumer China be next?
Plus, if US stock markets do have a major correction then gold’s spectacular out-performance after the global financial crisis from 2000 to 2011 will be remembered.
In summary, gold is right out of favour this summer. If you think the global economy can cope with the Fed’s higher interest rates and a trade war and a US stock market correction this autumn without a recession, then gold prices may go lower.
But seasonal gold cycles and a massively over-valued US stock market suggest there are still golden times ahead for the precious metal as shares, bonds and even real estate collapse. Any contrarian investor ought to be a buyer of the cheapest hedge against a financial market crash right now.
Peter Cooper has been writing about finance in the Gulf for more than 20 years
